Will Microsoft ever change the restrictions for Windows Phone 7?

The specifications were originally introduced in February 2010. I'd say right now the Minimum Specs are slack enough to make a good budget phone. I'm sure MS isn't too bothered about the extreme low-end budget market anyway because that's not where the profit is.

The only thing I see changing would be the hardware button requirements, which might be ditched soon for phones say 4.3" and larger in size.

there are strong rumours around better specs coming with mango release phones, one of the phones had a 1.5ghz processor for example. the way wp7 is written its optimised for hardware so even the standard snap dragons on wp7 are smoother than the tegra dual cores on android.